Private mortgage insurance: what you need to know

Whether you’re a long-time homeowner or you’ve started shopping for your dream house, you’ve likely heard about private mortgage insurance (PMI). Like any insurance, PMI is an added cost. Here’s what you need to know about PMI, including how to avoid it, if you can.

What is PMI?
PMI is a type of mortgage insurance you might have to pay if you have a conventional loan and less than a 20 percent down payment. PMI may help you qualify for a loan you might not otherwise be eligible for. At the same time, it may increase the cost of your loan. And, it doesn’t protect you if you run into problems on your mortgage. It only protects the lender.

How do I identify this cost?
Sometimes, lenders offer loans that exclude PMI. Such loans may come with a higher interest rate. PMI is disclosed on the Loan Estimate under the Projected Payments section as well as the Closing Cost Details. Some loans which require PMI, may need both a payment at closing and a monthly premium.

When can I stop paying for PMI?
Remember the 20 percent rule. Once you’ve reached 20 percent equity in your home (meaning your loan amount is less than 80 percent of the home’s market value), the lender may no longer charge PMI.

Even with a 20 percent stake in your house, it’s possible you may have to pay PMI a little longer. Policies are generally purchased for a year. Monthly payments are held in escrow to cover yearly premiums. You may have to continue paying the premium until the year your 20 percent equity ends.

Also, if you live in an area where home values have risen, consider getting a new appraisal if you’re paying PMI. If your home has increased in value to get you past the 20 percent threshold, you may be able to cancel the PMI on your loan.

Use this advice to help decide if you’re willing to pay PMI or wait until you have (more) money for a down payment.